What Companies Need to Know About the IRS Pause in Processing and Increased Scrutiny of Employee Retention Credit Claims

The IRS recently announced that it will stop processing any new claims for the Employee Retention Credit (ERC) through at least the end of the year due to concerns that a large number of recent claims are invalid. The ERC, enacted as part of the CARES Act in 2020, provides a refundable tax credit for eligible employers impacted by the pandemic from March 13, 2020 through September 30, 2021.

This is not the first time the IRS has expressed skepticism about these claims.  In March 2023, the IRS announced that ERC was added to its annual Dirty Dozen list of tax scams and has increased enforcement action involving ERC claims. In July 2023, the IRS announced it was increasingly shifting its focus to review ERC claims for compliance concerns, which include increased audit activity and criminal investigation of promoters and employers. The IRS has reported that it has trained agents to aggressively audit ERC claims and its employees are working hundreds of criminal cases and have referred thousands of ERC claims for audit.

Taxpayers who have already claimed ERC should consider the following:

• • Carefully evaluate your claims in light of the IRS guidance. Taxpayer Taxpayers who improperly claimed ERC may be required to pay back the erroneously claimed ERC amount, resulting in additional tax liabilities, as well as accuracy-related penalties. Taxpayers may also face criminal charges. Taxpayers who claimed the ERC credit though a promoter who is under investigation likely will face scrutiny through audit.
  • If you are concerned about the validity of your claims, or you fear you may have miscalculated your amounts, consider participating in the IRS’s upcoming self-disclosure program to avoid penalties.
  • If you have submitted a claim about which you have concerns, but have not yet received payment, consider participating in the claims’ withdrawal program.
  • Anticipate increased processing times for your claim. The IRS stated that its standard processing goal for existing ERC claims will go from 90 days to 180 days, and the time to process a claim could be much longer if the claim faces further review or audit.

Taxpayers who anticipate submitting claims should consider the following:

• • Consult with your tax advisor to ensure that your claim has a solid basis and is calculated correctly.
  • Have an “audit ready” file containing all documentation supporting your claim. Careful documentation and planning will be necessary to ensure that ERC claims survive IRS audit, as the IRS is likely to apply even greater scrutiny to new claims filed years after the pandemic. Taxpayers should consider whether they have adequate, contemporaneous documentation to show eligibility and support the tax periods for which they plan to claim the ERC, which may include relevant shutdown orders, the number of employees, wage data, financial statements, payroll records, invoices, and receipts.
  • Anticipate increased scrutiny regarding your claim, which may involve questions from the IRS, and audits of the claims’ bases.
  • Anticipate increased processing times.